The end of the world? I don’t think so

One of the Christmas offerings from Hollywood was the mother of all disaster movies called 2012. Hollywood is surely taking advantage of both the popular fears and pessimism that abounds in the current climate and the Mayans lack of foresight in extending their calendar beyond 21st Dec 2012.

However when we get to 2012 and beyond (yes I’m going to go out on a limb and say the human race will still be here and Mount Trashmore may well be piled higher and deeper) let us consider if we will meet our supposed doom surrounded by fire or ice. Or in financial terms, inflation or deflation. I realise it’s a “stock watch” column but its fundamental, before you pick a stock, that you consider your inflationary expectations. So where have we been?

Over the past twenty five years the world economy has been dominated by an over borrowing and arguably over-consuming America living side by side with an over saving and over producing China. How convenient. Excess demand from America has been offset by excess supply from China. The Global Financial Crisis and The Great Recession of 2008 have clearly upset that symbiotic relationship. A perfect solution would be for the Chinese to save less and spend more. But alas with China only just beginning its industrialisation process it’s unlikely any time soon that the people of the red army will become net consumers rather than producers.

The one thing that the United States, China and much of the developed world have in common is the massive gains in technological advances over recent decades. This will continue to drive world productivity growth for the foreseeable future. It really is difficult to envision hyper inflation as the US massively deleverages in a world where there will be a lack of borrowers and abundant savers. For example Japan’s deleveraging has been highly deflationary over the past twenty plus years. This has essentially given government central banks room to wiggle and great confidence to deploy, what would